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Singapore's surprise property curbs

  • Singapore government’s surprise property tax change
  • Reasons for initiating steps towards the change
  • Effects on market, investors, developers and banks

 

Singapore is a global financial centre and sovereign city-state located in Southeast Asia with a high degree of reliance on investments, foreign trade, technology and manpower. Moreover, being a city-state, Singapore is highly urban, with a population density of 8,274 people per square kilometre and it has one of the world's highest rates of home ownership, at 90%. The Economist Intelligence Unit (EIU) ranked Singapore as the most expensive city for living in the world, for the fifth year in a row in 2018.

Being the world’s capital for global affairs and a popular investment destination, the property tax has become an established component for Singapore's tax system, which contributes more than 9% to the total tax revenue collection. Further, all immovable properties in Singapore, including Housing Development Board (HDB) flats, houses, offices, factories, shops and land are subject to Singapore property tax, whether it is owner-occupied, rented out or vacant. The property tax is calculated as a percentage of Annual Value (AV) of a property, which is based on the estimated yearly rent a property can fetch. The property tax is administered by the statutory body, the Inland Revenue Authority of Singapore (IRAS), under the chairmanship of the Minister of Finance.

In recent times, while the major property markets globally, from New York to Sydney, have shown signs of cooling, the property prices in Singapore have soared and have caused unease among the local policymakers. Record land bids and redevelopment bids backed by rebound in speculative demand started as a threat and was undoing years of carefully implemented curbs in Singapore.

Hong Kong and Singapore, both have traditionally attracted foreign property investors due to a high transparency with fewer investment hurdles. In November 2017, Hong Kong increased the stamp duty to 30% for the foreign property buyers and this made Singapore a more attractive destination for overseas property investors.

A key measure of exultation for Singapore is its so-called en-bloc market, where a group of owners band together to sell blocks of old apartments for redevelopment to property developers. Over the past years, land prices have shot up by 15-20% (Source: CBRE Pte. Ltd.), fuelled by the en-bloc deals and record bids in government land sale program. These transactions have surged in the recent months and such deals worth more than a combined of S$8 billion and S$10 billion were signed in 2017 and 2018, respectively. Singapore’s home sales jumped to its highest levels in nine months (May 2018) as developers sold 1,121 units.

At the same time, the Singapore residential property price index increased by 9.1% in the last four quarters, from its trough in July 2017. This was in contrast to a declining trend observed over the four-year period (mid-2013 to mid-2017).

Furthermore, new housing loans surged by 34% over the last 12 months, ending in July 2018, after a 25% jump in the property transactions as compared to the previous year ([2017], [Source: Monetary Authority of Singapore {MAS}]). According to the MAS, the housing and bridging loans in May 2018 stood at S$203.1 Bn, accounting for more than 30% of the total loans.

Further, the real median monthly household income from work grew only 1.5% last year (2017). This was the lowest since 2009 due to a higher inflation in 2017, in contrast to the deflation in 2015 and 2016. The growth in wages has not kept pace with the nation’s GDP growth, which generally hovered above 3% over the last few quarters, resulting in stretched housing price to income ratio.

The surge in new housing loans, a wage growth lagging behind the economic expansion, rising interest rates, low inflation rate and the recent trade war situation prompted the policymakers to take a pre-emptive action. The Singapore government has in the past regularly intervened to keep the property prices under check and after the central bank noted a ‘euphoria’ in the property market, the government on the 5th of July 2018 raised additional buyer stamp duty (ABSD) and tightened the loan-to-value (LTV) limits on residential property purchases. This was done to control the property price surge. Almost all categories of private residential property buyers were affected by this move. While ABSD for Singaporean citizens and for the permanent residents purchasing their first residential property remained indicted by the government at 0% and 5%, respectively. Further, ABSD rates for all other individuals and entities were raised by 5% and 10%, respectively. Additionally, for entities buying residential properties for development, the ABSD was raised by 10% to 25%, with a further 5% imposition on developers.

The value of loans that buyers can borrow for private properties known as loan-to-value (LTV) was slashed by 5% points for all categories of buyers. All these steps are intended to discourage new home buyers in Singapore.

Summary of ABSD changes

However, these measures of the government came as a surprise to buyers as well as developers. According to the Real Estate Developers Association of Singapore (REDAS), the new property curbs are a ‘big setback’ for Singapore's property sector and will negatively impact property developers, investors and home buyers. The individual housing demand is expected to slow down due to an increased financial burden on buyers post ABSD and LTV changes. For instance, buyers looking to buy a second unit worth S$1.0 million will have to pay an additional S$50,000 in cash due to a reduction in the LTV and a total stamp duty of S$144,600 due to increase in ABSD.

On the other hand, the property developers are fearing a demand slowdown and weaker property prices. These developers are required to sell all the units in a project within five years of project launch date, failing which, they are liable to pay stamp duties on the land price. Hence, post recent curbs, developers will now have to pay 25% of the land cost instead of 15% paid earlier if they are unable to sell all the units within the timeline. Further, many developers have bought land at high prices in expectation of property demand growth and price rise. Hence, if the demand is weak after the recent curbs, it will translate into weaker prices and developers will be forced to clear the unsold inventory at lower prices, this will eventually hit their margins. However, these curbs will discourage foreign purchases of residential property (which accounted for one third of luxury property deals in 2017) and increase Singaporeans’ and permanent residents’ share in the residential property segment, as the additional buyer's stamp duty on foreign purchases of residential property increased to 20% from 15%, while for citizens the extra charges only apply on the second and subsequent home purchase. 

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